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Cuba’s Misguided Import Limits Undermine Social Development

By: Iván Cachanosky - @ivancachanosky - Sep 12, 2014, 1:03 pm

EspañolIn 2009, Cuba began implementing timid free-market reforms, in part to stem the tide of defectors that have fled the country for nearly half a century. That same year, US President Barack Obama lifted restrictions that prevented Cuban Americans from returning to the island.

Cuban expats soon began importing a wide variety of US products during their visits back home.

In response, Cuban President Raúl Castro recently implemented a restriction on the amount of goods that Cuban travelers can bring with them when entering the country.

In the eyes of the Cuban government, this measure combats two evils: an unfavorable balance of trade due to the growing number imports, and threats to local industry in the face of international competition.

However, even if the measure is motivated by good intentions, it will only perpetuate the impoverishment of the country.

The Trade Deficit Fallacy

Trade is the exchange of money for a good or service. When someone offers product A in exchange for product B, he is exporting A and importing B. In order to import, it is necessary to export, and vice versa. By definition, limiting imports limits exports.

The introduction of money as a medium of exchange does not alter the conclusions of this theory. Trade deficits or surpluses, along with borrowers and creditors, are an inherent aspect of international trade. It is completely misguided to assume that the balance of trade will improve by limiting imports, because exports will be restricted as well.

Trade takes place between individuals, not between countries. It is not countries that trade with one another, but rather individuals residing in those countries conducting transactions. An exchange made inside or outside the borders of a country does not change the essence of trade: in order to obtain a good, one must offer something in return.

Commerce promotes prosperity. Since its conception, all countries have benefited. Some countries have benefited more than others, but wealth in all countries has risen. This is not a minor point; from this we dismiss the idea that economic activity is a zero sum game.

If Raúl Castro wants sustained development for Cuba, hindering imports is not the way to achieve it. His options, however, remain limited in light of the US trade embargo.

Misguided Protectionism

Protection of local industry is the second argument that the Castro government uses to justify the new restrictions. According to proponents of the policy, if visiting Cubans bring higher quality, low-cost products to the island, local industry will be destroyed.

Adherents to this school of thought should first consider the type of economy that manages to produce quality goods at a lower cost. Was it a planned economy like Cuba’s? Or was it a market economy that, despite its faults, encourages competition?

Restricting imports will only further perpetuate poverty in Cuba.
Restricting imports will only further perpetuate poverty in Cuba. (Flickr)

The answer is clear: competition creates better products at better prices. It is the spontaneous order of supply and demand that allows people to get the products they want. Economic planning does not take consumer demand into account.

A Cuban official could argue that the Cuban footwear industry should be developed, while another official favors the development of the electronic industry. Who is right? Probably neither of them, because production depends on demand, not futile attempts at reading people’s minds.

Economic liberalization is Cuba’s best option. The economist Henry Hazlitt, in his book The Conquest of Poverty, maintains that all countries benefit from international free trade, even underdeveloped ones. Less developed countries are able to adopt technological innovations made ​​by developed countries without incurring research and development costs. They are free riders of the best inventions in the world. Meanwhile, open markets, and the entry of new enterprises, provide a variety of employment and investment opportunities.

Under these conditions, Cubans will be able to save and invest, as the prices of formerly regulated imports fall.

Racial Obstacles in Cuba?

Last week, Reuters reported that pro-market reforms implemented by Castro are deepening the island’s racial gap.

However, the article fails to mention that racism on the island predates the current communist regime. In 1959, when Fidel Castro launched his revolution to overthrow the dictatorship of Fulgencio Batista (1952-1959), the island already suffered from deep-seeded racial issues. Free-market reforms did not create these problems.

Communism does not permit proper economic development, and the social mobility that comes along with it — something the United States has been able to achieve.

Countries whose economies are more open tend to reduce levels of discrimination, whether it’s the United States electing its first black president, or female heads of state in Argentina, Chile, Brazil, and Costa Rica.

The world is becoming increasingly more inclusive. Cuba should be able to open itself to the world, and eliminate its racial problem.

To accomplish this, the island must overcome the two biggest obstacles it faces today: its own interventionist policies, and the sanctions imposed by the United States.

Translated by Rebeca Morla.

Iván Cachanosky Iván Cachanosky

Iván Cachanosky holds a bachelor's degree in business administration and a master's degree in applied economics. He's currently an instructor at CMT-Group. Follow him on Twitter at @ivancachanosky.